Why a Conceptual Framework?
Purpose of the Conceptual Framework:
Assist IASB in development and revision of accounting standards
assist users in application of IFRS (interpretation of guidance)
Restrict IASB’s judgment
Protect IASB against political pressure from constituents
Ensure consistency of accounting standards
Structure of Framework
Three Levels:
first level = Basic objective
second level = qualitivie characteristics and elements of financial satements
third level = recognition, measurement and disclosure concepts
Objective of IFRS
provide financial information about company to existing and potential investors, lenders and other creditors in making decision about investing
Decisions:
buying, selling holding equity and debt instriuments
exercising voting rights influencing managments actions
Useful information:
helps to estimate the value of the reporting entity
helps in assesment of prospects for future net cash inflows (amount. timing and certainty)
helps in assesment of management’s stewardship of the entity’s economics resources
Financial Reporting Model
Coneptual dominance of assets-liabilities- approach:
Primacy is given to assets and liabilities
Definition and recognition of income statment elements is a directs consequence of change in assets and liabilites
Approximation of entity value in the balance sheet
Measurment at net present value (discounted future cash flows)/ fair vale (market price)
Remaining elemts of revenue-expense-apporach in older standards:
profit (changes in assets and liabilities) as an indicator of an entity’s perfomance and logn-term earnings power
realization pricinple and matching principle
Recognition of (deffered) items in the balance sheet taht do not represent resources or obligations:
recognitions of a claim towards the customer during construction even thoiught claim only arises when finished (IFRS 15)
recongitnion of government grants as liability and systimatic allocation over accounting periods even though no obligation exists (IAS 20)
Hierarchy of accounting Qualities
Fundamental (Primary) Quality - Relevance
Relevance:
Predective value
confirmatory value
Use:
prediction of futre outcomes
provides feedback about previous evaluations
Fundamental (Secondary) Quality- Faithful Representation
Faithful Representation:
completness
neutrality
free from error
information must faithfully represent the relevant economic phenomena
Relevance and Faithful Representation
Enhancing qualities:
comparability
verifiability
timeliness
understandability
Elemts of Financial Statements
Asset
Liability
Equity
Income
Expenses
present economic resource controlled by the entity as a result of past events
present obligation of entity to transfer an economic resource as a result of past events
(Haftung)
residual interest in the assets of the entity after deducting all its liabilites
Increase in assets or decreases in liabilites that result in increses in equity, other thatn those relating to contributions from holders of equity claims
decreses in assets or income in liabilites that result in decreses in equity, other thatn those relating to distributions to holders of equity claims
Asset definition elements
economic resource = right with potential to produce economic benefits
control
as a result of past events
General Principles
previous recognition principles:
Porbability of future economic benefit
reliable measurement of cost value of the element
new recognition principles:
Relevance
faithful representation
benefits exceed costs
Measurment principles
previous measurent principles:
historical cost: acquisition or production costs
fair value: price that would be received to sell asset
NPV: present discounted value of futre net cash inflow
IAS 2 (Invesntories): lower of historical cost and net reliazable value
IAS 40 (Investment Properties): historical cost or fair value
IAS 41 (Agriculture): fair value
new measurment principles:
measurment basis must reflect the nature of the information that the measurment basis will produce
selct measurment basis that provides most useful information, i.e. must meet qualitative characteristics
Histrical cost
current value
fair value
vlaue in use/ fulfilment value
current cost
Last changed2 years ago